I love the fact that Kenyans are increasing their literacy when it comes to Finances.
It is good to hear many people asking after MMFs and other
asset classes.
I would like to explore a few pros and cons of this asset
class in this article
Pros
Ease of liquidity. It is so straight forward that you can
deposit money today and request for it after three days and it will be readily
available much like a regular bank account. This makes it ideal for money you
need to access speedily. Unlike the bank which will keep your money at little
to no benefit to you, this will give you the benefit of returns no matter how
short a duration the money stays.
Ease of joining. Just like a normal bank account you will
fill a form and submit your identification documents and KRA PIN. That alone
will be enough to get you started once you deposit the initial amount. This
varies across different providers.
Modest returns. Most of them will give you returns above 10%
per annum. The returns are also compounded meaning the longer you stay and
maintain discipline the more you will earn from it. This is one of the easiest
ways to generate passive income.
Flexibility of contributions. You are at liberty to top up
your contributions at any time with any amount though some will have a minimal
top up amount.
Spread of risk in low exposure instruments. The fund
utilizes call deposits, T-bills and bonds. These are low risk instruments which
have little risk of default.
Cons
A challenge to maintain saving discipline because of zero
safeguards. Since no one requires you to contribute regularly, you are likely
to slide into indiscipline when it comes to growing your money steadily.
Ease of liquidity makes long term saving tricky-requires
great restraint. Unless you are highly disciplined or put an automated system
in place to grow your long term savings, you will not be able to go too far.
That liquidity is a blessing and curse in equal measure depending on how you
navigate it. You need to be clear on what you are saving or investing towards
and if you realize the MMF is derailing your long term goals, then switch to an
alternative that will make it easy for you.
Variable disparity in gross and net return. It is important
to know that there is a gross and net return. There are fees and taxes
applicable to the return which you need to take note of as you sign up. Think
about the net return because that is what you should be expecting.
Returns Subject to market forces-applicable to majority of
asset classes. While the MMF is low risk it is still subject to the movements
of the market. Any shocks will touch the returns but the beauty is that this is
not exclusive to MMF but affects majority of classes
Laissez faire approach to contributions takes away predictability
of position. It is difficult to predict your own growth as an investor except
you put in safeguards in the form of automated savings.
To choose or not to choose MMFs as an investment vehicle?
That depends on your goals and aspirations.
